Research will address the analysis of the main forces driving demand growth in the housing market, namely growth in real net disposable income and population, as well as the importance of investment alternatives in non-real assets, mainly financial assets. Hence the influence of expected inflation, inflation-adjusted long-term interest rates, and, in general, expected returns on alternative financial assets to investment in real assets, as well as other institutional factors such as transaction costs and the proportion of home ownership, etc., which also have an important impact on house prices.

We will also study the academic literature that discusses how institutional factors influence the housing market. As housing behaves like a normal good, there is certainly a close relationship between the increase in real net disposable income and the demand for housing and, since supply cannot react as fast as demand, episodes of strong house price inflation are common. During the preceding economic crises of 1973-74 and 1990-91, the housing market has been instrumental as a means through which excess expenditure relative to domestic productive capacity has been directed. The possibility of generating accelerated price rises in the housing market well above the growth of households' real disposable income, together with the possibility for the latter to obtain the financing they need with relative ease, has at different historical moments fuelled strong speculation processes in the real estate market in several European countries (Spain, the United Kingdom, Ireland and, to a lesser extent, France), as well as in the United States. Hence the importance of the central bank in controlling these more or less speculative processes, whose role is crucial for the management of liquidity in the economy and the sector.

Research will analyse how real estate investment responds to changes in the tenor of monetary policy. By means of a comparison with other European countries, the aim is to study which of the traditional channels, investment or consumption, play a preponderant role in the transmission of monetary impulses. Research will examine the possible spillover effects of the housing market on the national economies of the countries mentioned above through the influence of the wealth effect on consumption and the impact of long-term interest rate expectations on investment. The importance that the transmission channels will have in each of the European countries we analyse will most likely be explained by the differences in the responses of investment in the real estate market, but also by the weight of real estate consumption in total aggregate demand.

In addition, the extent to which an easing of monetary conditions during the recent financial crisis may have affected mortgage holders will also be analysed. The reduction resulting from such monetary easing is likely to have produced substantial debt relief among mortgage holders. This may be especially true in those peripheral countries where the weight of housing in total household net wealth is higher; as well as in those where most lending is predominantly at variable interest rates.

Contributors

• Ana Benito Mulet - Universitat de València
• Alejandro Jimenez Correal - Universitat de València
• Paloma Taltavull de la Paz - Networked Biomedical Research Centre-Cancer Area (Madrid).

Work group

• Ignacio de Angelis - National University of Central Buenos Aires.

Other monetary intermediation